Basics of Retirement Plans

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Chapter 14

• Basics of Retirement Plans

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Employer-Sponsored Plans Defined Benefit vs
Defined Contribution

• Defined Benefit
• Defined Contribution
• Vesting period

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Defined Benefit Plans

• Funded
• Unfunded or underfunded

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Retirement Plans

• Beware of investing in companys stock
• Enron!
• Global Crossing!
• Adelphi!
• WorldCom!

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Employer-Sponsored Supplemental Plans

• Profit-sharing plans -- contributions
• can vary yearly due to profitability
• can depend on your salary level
• are not guaranteed
• Employee Stock Ownership Plan (ESOP)
• Contributions are made in the form of company
  stock
• Risky plan because plan does not allow for
  diversification

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Employer-Sponsored Supplemental Plans

• Thrift and savings plans
• Supplements pension
• Employers match a set of your contribution to
  your retirement plan
• Usually employee contributions are taxable
• Contributions are normally guaranteed

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Employer-Sponsored Supplemental Plans

• Salary Reduction Plans -- 401(k), 403(b), 457
• Your contributions are tax-deferred
• Your earnings grow tax-deferred
• Matching contributions
• Offer a wide variety of investment choices
• Maximum amount 15K in 2006
• People over 50 can set aside 20K 2006
• Roth 401(k) contributions after-tax

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Self-Directed Retirement Programs

• Keogh plan self-employed full-time or
  part-time, for self or employees, tax deferred
• Simplified employee pension plan (SEP- IRA)
  like Keogh aimed toward small businesses usually
  with no employees
• Limited to 44K or 25 of earned income in 2006
  tax deductible tax deferred

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Self-Directed Retirement Programs

• Individual Retirement Accounts (IRAs)
  Traditional
• Deductible IRA available to workers without
  workplace retirement plans and non-working
  spouses with AGI less than 70K jointly 5K each
  in 2008 rules for partial deductibility with
  80K jointly.
• Nondeductible IRA available to anyone who doesnt
  qualify for the deductible IRA earnings tax
  deferred
• Limited to
• Maximum amount 5K by 2008
• People over 50 can set aside 1K extra
• Earnings grow tax-deferred until withdrawal

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Non-working spouses and traditional IRAs

• Allows non-working spouses to make a deductible
  contribution (spousal IRAs) up to 5K in 2008 if
  joint income lt150K
• Allows for penalty-free withdrawals if
• youre buying your first home -- up to 10,000
• are paying college expenses
• are at least 59 1/2 years old

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Roth IRAs

• Available to workers and non-working spouses with
  joint AGI less than 150K in 2006
• Maximum contribution is 5,000 in 2008
• After-tax deposits but tax-free withdrawals

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Free Money IRA

• Tax credit (free money!) up to 1K for
  contribution to IRA
• Born before January 2, 1990
• Not a full-time student
• Not claimed by parents on tax return
• Maximum income is 53K joint (26.5K single)
• http//www.irs.gov/publications/p590/ch05.html

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Types of Retirement Payouts

• Single life annuity -- the payments continue as
  long as you live
• Life annuity with period certain -- the payments
  continue as long as you live however, if you die
  within the certain period the payments continue
  until the end of the period

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Types of Retirement Payouts

• Joint and survivor annuity -- the payments
  continue as long as you or your spouse live
  however, in some cases the benefits will be
  reduced when you die
• Lump-sum -- a single payment of all principal and
  accumulated interest

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Annuities

• Investment with life insurance firm to pay you a
  fixed monthly stipend over agreed-upon time
  period
• Insurance firm creates a pool of annuitants
  funds from those who die earlier support those
  who live longer

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Annuity Classification

• Single premium vs installment
• Disposition of proceeds
• Life annuity no refund
• Guaranteed minimum
• Short-term annuity

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Annuity Classification

• Inception of benefits
• Fixed vs variable annuity -- risk and return
• Fixed protects against outliving investments but
  receive lower returns
• Variable provides no guarantees and fees can be
  high (2.28 of assets), so invest on your own!

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Variable Annuity

• Death benefit
• Minimum may just be the amount you invested or
• Amount invested plus 5 to 7 in annual interest
  or
• Accounts highest value as of a set date each
  year
• When to use one?
• Already put away maximum allowed in 401(k), IRA
• Invest in very high risk securities so that even
  if you bomb, your heirs will get back 5 to 7.
• Go with low-cost funds TIAA-CREF or Vanguard
  Group.

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Social Security

• There is no such thing as a Social Security Trust
  Fund
• Show me the money!

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Social Security

• Money flows through to retirees transfer
  program
• Extra money is lent to Feds

• 47-to-1 at start will be 2-to-1
• Most people did not live to 65
• Meant to be supplemental benefits

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Social Security Snapshot
Type and number of beneficiaries of SS, as of
Dec. 2007 and total monthly benefits (WSJ, Sept.
13-14, 2008)
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When a woman outlines her husband, her income and
expenses fall by what ?

• Income

• Expenses

• 20
• 30
• 40
• 50

• 20
• 30
• 40
• 50

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When a woman outlines her husband, her income and
expenses fall by what ?

• Income

• Expenses

• 20
• 30
• 40
• 50

• 20
• 30
• 40
• 50

Social Security (WSJ, Sept. 13-14, 2008)
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Maximum FICA Paid

• In 2008, taxes are paid on income up to 102,000
  (106,800 in 2009).
• 102,000 x .0765 7,803 per year
• 106,800 x .0765 8,170
• Amount matched by employer

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What is the maximum SS benefit one would receive
in 2008 at full retirement age?

• 1,985 per month
• 2,185 per month
• 2,385 per month
• 2,585 per month

Social Security (WSJ, Sept. 13-14, 2008)
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What is the maximum SS benefit one would receive
in 2008 at full retirement age?

• 1,985 per month
• 2,185 per month
• 2,385 per month
• 2,585 per month

Social Security (WSJ, Sept. 13-14, 2008)
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Lets examine those numbers

• Maximum payout 2,185/mo.
• Maximum payment 15,606/yr

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Questions?